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July 01, 2021 | GSAM Connect

Withdrawal Rate

Finding Investment Opportunities as Stimulus is Withdrawn

As we move from recovery to mid-cycle expansion, we think the rate at which policy support is withdrawn will guide financial asset performance. In this publication, we outline where and how we seek to find compelling investment opportunities for our clients’ fixed income portfolios in this environment.

Keep Calm and Carry On

Financial assets have posted a remarkable recovery following the onset of the pandemic, with performance boosted by extraordinary monetary and fiscal easing. Asset price appreciation is common during the early innings of an economic recovery but as pandemic stimulus recedes and growth momentum peaks, fixed income valuation expansion and room for spread compression will likely moderate (Exhibit 1). In the next phase, we believe income—or carry—will be a dominant driver of returns relative to capital gains. But as the hawkish market response to the June Federal Open Market Committee (FOMC) meeting demonstrates, withdrawal of policy—or even simply discussion about that withdrawal—will generate market volatility.


Source: Macrobond, Goldman Sachs Asset Management, ICE BoAML and J.P. Morgan. As of June 23, 2021.


Entering a New Cycle with a New Policy Configuration

Two uncertainties have potential to make this episode of policy normalization more volatile than during past cycles. First, we have no playbook for a post-pandemic economy in the 21st century. Digitization of the economy has sprung forward while recent years’ gains in labor force participation—particularly among women—have been unwound. Second, investors are faced with a new policy configuration in which policymakers appear more focused on broader social goals including the climate transition and inclusive growth. The impact of these goals on the economy, neutral policy rates and in turn, financial markets remains uncertain.

Between (an Unwind of) Stimulus and Response, There is a Space

As active investors, we have freedom to choose our investment response as pandemic policy support is withdrawn and as another space is opened up, one in which market volatility that had been suppressed by central bank actions may be revived.

Tactically, we are focused on locating investment opportunities that may arise from sharp swings in asset valuations amid elevated macro data volatility and uncertainty around central bank reaction functions. Strategically, we seek to optimize carry and roll potential through asset allocation across fixed income markets to build balanced and resilient portfolios for our clients.

We are mindful that low credit spreads reduce the buffer for potential negative growth shocks or rising yields. This is why we pair fixed income spread sectors such as corporate credit and emerging market debt (EMD) with a rates and currency hedge.

A Continuous “Building Back Better” Mindset

As we move beyond the pandemic, we remain committed to enhancing our investment platform. Like the increasingly digitized world around us, we engineer our investment process to be data-driven. This enables us to make smarter investment decisions faster and more cost-effectively. At the same time, we sustain a focus on sustainable investment solutions. At Goldman Sachs, we view sustainability through a broad lens that is underpinned by two holistic pillars: climate transition and inclusive growth. These pillars guide our engagement with bond issuers on environmental, social and governance (ESG) factors and our partnerships with clients on sustainable investment solutions.

We invite you to learn more by downloading the full report.


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